Conflicts & confidentiality (2)

The twin issues of confidentiality and disclosure have sheltered under the portmanteau term 'conflicts' for years, partially the result of an ill advised inclusion in the same chapter on conflicts in the Guide to Professional Conduct. However, despite the fact that confidentiality is now the subject of a new rule, r 16E, it has continued to be troublesome. The ink was not yet dry when concern was voiced by some City firms that the new confidentiality rule was unworkable. As a result of those representations, an amendment has been made, in the last few days, to the Guidance Note which will accompany the rule when it becomes Rule 4 of the new Code of Conduct, due to come into force in the first part of 2007. However, the fact that a 'running repair' proved necessary so soon after the rule came into force is testament to the fact that this remains a volatile area.

The duty of a solicitor to protect confidential information is paramount. Even after the determination of a retainer, when the fiduciary duty of loyalty has ended, the duty to keep confidential information remains. It is this ethical 'tug of war' between the potentially conflicting the duty of confidentiality and the duty to disclose which is at the heart of most of the difficult conduct issues in this area.

New principles and exceptions

At first glance, there seems little in new r 16E that is especially novel or controversial until the detail is unpacked. The core duty of confidentiality in r 16E(2) simply confirms that 'you and your practice must keep the affairs of clients and former clients confidential except where disclosure is required or permitted by law or by your client or former client'. Similarly, the duty of disclosure in r 16E(3) that 'you must disclose to a client all information of which you are aware which is material to that client's matter, regardless of the source of that information' is hardly groundbreaking. However, the general principle in r 16E(3) is subject to exceptions. In addition to the established caveat that there is no duty to disclosure information that could result in serious physical or mental injury being occasioned to any person, two completely new exceptions require closer scrutiny:

Duty of disclosure: confidentiality override 16E(3)(i)

This important new section makes it clear that the duty of confidentiality will override any duty to disclose. The general duty of disclosure in r 16E(3), set out above, requires that 'you must disclose to a client all information of which you are aware which is material to that client's matter regardless of the source of that information', unless one of the exceptions in r 16E(3)(i) or (ii) applies. Therefore, if a solicitor has knowledge of confidential information that is material to the affairs of a new client or matter, and that information is still subject to a duty of confidentiality in favour of a former or current client, then the solicitor may not act. There is no hand-wringing about which duty takes precedence: confidentiality trumps disclosure. Although it may be possible to transfer the matter to another person within the firm, the fact that the client would have to be told that someone within the practice has confidential information to which access cannot be given, may be sufficient to damage the all but the most sophisticated solicitor and client relationships. It damages the spirit, if not the letter, of the fiduciary duty of loyalty.

Varying the duty to disclose 16E(3)(ii)(B)

This section provides that parties can agree that no duty to disclose arises. In practice, the section will be used most often by those who wish to instruct firms with a specific sector specialisation to ring fence the confidential information that individual solicitors have acquired whilst acting in the sector for various clients. The fact that confidentiality trumps disclosure does not mean that the duty to disclose has been completely extinguished: it just establishes an ethical hierarchy. However, if the client 'absolves' the solicitor of the duty to disclose, as envisaged by this section, the solicitor may continue to act. Although much will depend on the individual circumstances, this is a high risk strategy given the danger that the whole arrangement could disintegrate, and fall victim to a form of conduct 'sepsis'. As soon as the solicitor starts to receive instructions which could be different if the client had access to the protected confidential information, it will be impossible to proceed further. Throughout the entire retainer, the solicitor will be on constant 'conflict alert'.

In addition to the new requirements regarding disclosure, a completely new confidentiality rule has been added and it is this section which has caused the most concern. While the section initially appears to just restate the principles in Bolkiah v KPMG [1999] 2 AC 222, it actually goes much further

Duty not to put confidentiality at risk by acting 16E(4)

In circumstances where an individual solicitor or a firm holds confidential information in relation to a client or former client, you must not risk breaching confidentiality by acting where:

i) that information might reasonably be expected to be material; and

ii) that client has an interest adverse to the first mentioned client or former client except where proper arrangements can be made to protect that information.

Again, the rule needs to be 'unpacked' and it is at this stage that the problems emerge. To be 'material', the information must constitute more than a 'passing interest'. The concept of 'interest adverse' is not defined in the rule, but the Guidance Note's original gloss is that 'essentially adversity arises where one party is, or is likely to become, the opposing party on a matter whether in negotiations or some form of dispute resolution'. This encompasses a potentially very wide constituency if the mere fact of negotiation is sufficient to create 'adversity'. The stricture is such that not only must you not breach confidentiality, you must not even risk breaching it. The 'no risk' threshold has always constituted a high hurdle for any law firm, even under the common law principle established in Bolkiah.

Traditionally, the method used to protect such confidential information has been the information barrier. At long last it has received official sanction and made its way into the professional rules. The Rules recognise two basic circumstances in which information barriers may be appropriate as exceptions to the general rule that confidentiality is not to be put at risk.

Where clients consent: 16E(5)

The client must know that the practice holds material information that cannot be disclosed, you must have a reasonable belief that both clients understand the issues, they have agreed to the conditions and it is reasonable in the circumstances to proceed in such a manner.

Where no clients consent 16E(6)

Where it is not possible to obtain consent from the client for whom the practice holds confidential information and the client for whom you now act on an existing matter knows that there is information that you cannot disclose. Typically this situation will arise when a solicitor changes firms. Most importantly, it must be reasonable for you to act in all of the circumstances and the information barrier must comply with the law applicable at the relevant time.

The Guidance Notes to r 16E make it clear that few firms will actually use information barriers, given the heavy and bureaucratic compliance issues, not just in setting up the information barrier, but in reviewing and monitoring it throughout the retainer. The implication is that only the largest City firms will have resources of the type to enable information barriers to be put in place for the most sophisticated of clients.

However, there was a real and very practical problem at the core of the Guidance Note to r 16E(4) that made this exception to the rule unworkable for the very limited legal constituency at which it was aimed. 16E did not simply recite the common law position, upon which the profession has relied in the recent past; it went much further in demanding consent. Even the most impregnable information barrier would have been an irrelevance under this Rule, if the former client decided to withhold consent to the firm acting for a new client. There is room for argument around the perimeter as to whether the information is confidential, if confidential, whether material, or whether the interests are really adverse. However, a simple 'no' would be sufficient to stop the firm, and their prospective client, in their tracks. In one sense, what possible reason would a former client have to be cooperative with their former lawyers? Furthermore, given the speed at which clients may need to act, the prospect of becoming embroiled in a conflicts side show may be rather less than appealing. Such clients may simply take the pragmatic route and instruct another firm.

The solution adopted, at least as an interim measure, is an amendment to the Guidance Note which accompanies the confidentiality rule. Firstly, firms are now to be allowed to obtain consent from their clients in advance as a condition of the retainer through the firm's standard terms of business, although this was prohibited in the original guidance. A properly drafted consent clause, a type of 'conflict pre nuptial', should enable a firm to act against a former client even if the firm still holds confidential information about that client, if the firm has put in place a sufficiently robust information barrier. The second change is to the guidance on the concept of 'adversity' discussed above. Now an 'interest adverse' will arise when 'each of the parties wants the matter to result in an entirely different outcome. In essence, adversity arises where the parties are in a hostile situation'. Therefore, it will not arise where clients are simply in negotiations 'towards an agreed outcome'. The most problematic areas of r 16E have at least been ameliorated for the present.

Conclusion

In certain respects the new conflict rules presage the introduction of a new 'risk-based' Code of Conduct. The onus is placed on the profession to take a considered view, especially in relation to the various 'exceptions to the rule'. The structure, relatively straightforward central principles, finessed by a few limited exceptions relevant to a small legal demographic, is to be welcomed. The rules will prove more than sufficient for the vast majority of law firms.

However, like the curate's egg, the new rules are good in parts. Until the recent amendment they were, in fact, much more restrictive than the common law. The Law Society's Guidance recognised that the 'exemptions' under r 16D and the use of information barriers under r 16E would only be used by large firms and the most sophisticated of clients, yet the rules proved unworkable in that context. This restriction, taken together with the need for 'common purpose' to be established and 'informed consent' obtained in r 16D on conflicts, does highlight a significant tightening of the Rules. The 'audit trail' detailing compliance with the requirements of each of the exceptions will be a costly and time-consuming process for all firms.

Further developments in this area are inevitable. The reaction of even the more sophisticated clients to standard terms and conditions incorporating wide ranging 'informed consent' clauses may not be universally favourable. While the duties set out in core r 16D and r 16E may be fit for purpose, at least for the majority of the profession, the exceptions, targeted at a specific legal sector, may still prove problematic even after the recent 'repair'. A clear example that you must be careful what you wish for!